By Jon H. Harsch

© Copyright Agri-Pulse Communications, Inc.

WASHINGTON, Feb. 17 – Agriculture Secretary Tom Vilsack told Senate Agriculture Committee members Thursday that with commodity prices, net farm income and ag exports all turning in stellar performances, he's still got serious concerns. Speaking in a hearing on “Agriculture: Growing America’s Economy,” Vilsack expressed particular concern about smaller farming operations, livestock producers and the dairy industry.

On the next panel at the hearing, Texas A&M Prof. Joe Outlaw explained one reason for farm sector concern. He said what he hears from the farmers surveyed by Texas A&M's Agricultural and Food Policy Center is the worry that “Congress will use these current high prices as justification for severely reducing the safety net provided by the different commodity programs. Most respondents felt that the current price volatility created a much more difficult business environment than they experienced in the past.”

 
Senate Agriculture Committee members meeting Thursday. Across the table, L to R, Sens. Amy Klobuchar, D-Minn.; Ben Nelson, D-Neb.; Tom Harkin, D-Iowa; Patrick Leahy, D-Vt.; Chair Debbie Stabenow, D-Mich.; Ranking Member Pat Roberts, R-Kan.; & backs to camera, R to L, Sens. Mike Johanns, R-Neb.; John Hoeven, R-N.D.; John Boozman, R-Ark. Photo: Agri-Pulse. 

Vilsack said “As we enter 2011, the farm economy continues to remain strong with U.S. agricultural exports, farm cash receipts and net farm income projected at or above previous record levels. Farm household debt levels appear to have stabilized despite increasing land values.” But he added that “While prospects generally look bright, recent sharp increases in prices for major crops are generating a range of concerns.”

On the plus side, Vilsack sees U.S. ag exports for FY 2011 at a record $126.5 billion, up 16% from $108.7 billion for FY 2010, and 9% above FY 2008's record $114.9 billion. Adding to the good news, “Cash receipts for producers are forecast at a record $341 billion in 2011, up $28 billion from 2010 and $57 billion from 2009. Cash production expenses are forecast to be a record $274 billion in 2011, up $20 billion from 2010 and $25 billion from 2009. With receipts rising faster than expenses, net cash farm income is forecast at a nominal record of $99 billion this year, up $7 billion from last year and nearly $30 billion from 2009.” Vilsack concluded that “After adjusting for inflation, five of the highest income years since 1976 have occurred during 2004-11 – 2004, 2005, 2008, 2010, and 2011.”

Vilsack noted as well that “The balance sheet of U.S. agriculture is expected to strengthen again in 2011. Consistent with recent trends, increases in debt are forecast to be offset by larger increases in farm asset values. As a result, the farm sector's debt-to-asset should drop further below last year's 11.3% in 2011.” He also pointed to improved credit conditions, with “ample availability of loan funds” except for “regions dominated by livestock, milk and poultry production which indicated slightly worsening farm credit conditions.”

Vilsack was also bullish on farmland, commenting that “The value of farm real estate rose by an estimated 3% in 2010, to a record $1.8 trillion. Strong prices for major crops and record farm income will likely cause the value of farm real estate to move higher in 2011.” But he noted that “While a benefit for existing landowners, high farm real estate values make it difficult for individuals who may wish to enter farming and increases operating expenses for individuals who rent farmland.”

Overall, Vilsack told senators that he's “cautiously optimistic” based on knowing that given today's good times, “the next downturn is right around the corner.” He said USDA is focused on helping farmers prepare for that downturn by creating new revenue streams from developing renewable energy and finding new ways for farmers to generate “ecosystem” payments for the conservation services they provide which offer “societal benefits.”

Pressed by the committee's Ranking Member Pat Roberts, R-Kan., Vilsack said that USDA is focused on helping all types of farms, including the largest. He said USDA is helping large commercial farms in ways which include expanding double cropping to maximize productive capacity; research on cropping systems which use less water, less fertilizer, and less pesticides; winning greater acceptance for biotech crops in the U.S. and overseas; helping EPA understand the farm-level impacts of its regulations; and expanding export opportunities. To help the rural economy as a whole, he said USDA is focused on developing new ways to attract venture capital into rural areas.

Reinforcing Vilsack's warning that a downturn may be coming, Federal Reserve Bank of Kansas City President Tom Hoenig told the committee that “Despite prospects of sustained farm income growth, U.S. producers must remain alert as they face challenges related to their very success and tied to recent developments in financial markets.”

Focused on land values, Hoenig explained that “Surging commodity prices and low interest rates have translated into increasing farmland values, which have eclipsed their 1980s peaks. In our Bank's fourth quarter 2010 Survey of Agricultural Credit Conditions, for example, cropland values in Nebraska and Kansas were nearly 20 percent above year-ago levels and more than 75 percent higher than five years ago.” He warned that “is nearly impossible to determine how much of the farmland boom may be an unsustainable bubble driven by financial markets and how much results from fundamental changes in demand and supply conditions.”

Painting a worst-case scenario, Hoenig said “Rising interest rates often coincide with falling farm revenues and higher capitalization rates, a depressing combination for farmland values. Moreover, even if crop prices remain high but capitalization rates return to their historic average, farmland values could fall by as much as a third, which most certainly would erode the financial health of the farm sector.” He concluded that following “the basic lesson that bad loans are made in good times . . . my nagging concern remains that current distortions in financial markets are increasing the risk that imbalances in asset markets will catch agriculture – and the U.S. economy more generally – by surprise once again.”

To watch a video from the Senate hearing, click the video play control:

To read written testimony or watch more video from Thursday's Senate Agriculture Committee on “Agriculture: Growing America’s Economy,” click here.

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